My products are complex with so many non-standard configurations, so how do I come up with standard prices?
“We started the business with standard products, and because we were nimble enough to customize, customers wanted to make changes. Lots of them. Sure, we could handle it when there were fewer orders, but now we have so many we can’t remember everything. The different configurations change our costs and the price, and they drive our purchasing group crazy trying to keep up. How do we keep offering the customization that helps us stand out from the competition?”
The real problem
The pricing problem was just the tip of the iceberg. Not only was the company selling something different than the standard product, they didn’t have a “standard” product anymore and couldn’t keep track of what was on each order. When the customer asked the salesperson for a change, there was no way to make sure people working on each step downstream, from Pricing to Purchasing to Production, knew what was on the order.
The customization was causing problems throughout the entire company. Purchasing was making mistakes, which caused problems in Production, which led to extra costs and unhappy customers.
The interview process was simple enough – dig into the most painful issue first and follow up with more questions, leading to valuable insights.
- What has changed from the way you used to work? Not much, we started with standard products and were always willing to make changes for our customers. That’s what set us apart. But back then, there weren’t many changes and there weren’t many orders and we’d just write a note on the order slip. Now we have grown and there are more orders and more people who want to make changes to what we offer. We just can’t keep up, and our people either aren’t seeing or just aren’t reading the notes anymore.
- How do you do your pricing? We have a standard price for each product, and as a customer makes changes, we add in the new costs and subtract out the costs for what they don’t want. It gets confusing fast, so we need sharp salespeople to keep up with it all.
- What kinds of problems does this cause your purchasing group? Purchasing has the standard Bill of Materials for each product and that’s what they order. Back when they had more time to look at all of the paperwork for each order, they would know what not to order and if there was anything extra they needed to order. Now they end up ordering things we don’t need and forgetting to order what we do need. That costs us in parts that we can’t return to our vendors and delays in shipping because we don’t have everything we need. It really wreaks havoc on Production.
- How does it hurt Production? Like the Purchasing, they know how to assemble the standard product, and they can make the changes needed when they know what the changes are. Production assembles whatever Purchasing orders, and they assume it is a standard product unless they get different parts. Most of the time, the mistakes are caught by the QC, but by then we have spent a lot of time and money on putting it all together. It has gotten to the point where Production never trusts that they are getting the right parts from Purchasing.
- Any other problems in Production? It is bad enough that products have to be remade, but the other problem we have is a lack of communication with Purchasing and Sales since the paper never gets back to them. That means the order gets hung up in Production with no one getting the right parts for it, which means delays for our customers, which means headaches for our salespeople.
It was clear that the client didn’t actually have many “standard” products anymore. Looking at their history, only 35% of the orders matched the standard.
The real task was to put together an ordering system that started with a template, but allowed for parts to be easily added and removed for each product. Each part carried with it a cost, a price, the purchasing information, and the packing slip information. Once the salesperson and customer agreed on what would be in the product, the order details would be entered into the system. Purchasing received a list of exactly what needed to be ordered rather than an amended “standard” template that had items crossed out and other items added. Likewise, Production saw only what needed to be assembled, not changes to a standard.
This also laid the groundwork for customers to be able to select what they wanted themselves. They could still talk to a salesperson, but if they knew what they wanted, they could customize their own product from the website at any time of the day or night, and no one would need to handwrite any notes. This freed up the salespeople to go after new business rather than spend their time as order takers.
It took a while for everyone to grasp that every product could be different, but once they did, they loved having a specific list of all the parts needed for each order.
Sales had a much easier time pricing the product, since each individual part had its own sales price. Orders from the website came in pre-priced, so the salespeople just needed to review the pricing and click a button to send the quote to the customer.
Purchasing found that they could tie critical information directly into each product, like PO number, serial number, order date, received date, etc. Production had a list of parts needed for each product so there was no confusion about what to build or how to build it. QC had a checklist that matched the order, and the sales people could see the status of the order as it went through the system. Not only did the pricing get easier for the salespeople, buying parts for the product and assembling it got much easier, too.
The nitty-gritty details
Similar to the issue of multiple items in a checklist, the system started with a list of all of the possible parts that could be added into a product and a template of what went into a “standard” product. When a customer or salesperson picked the “standard” product, all the parts were pulled into a list that they could then add to or remove from.
Each part record had a price built into it, so the product’s price changed dynamically as parts they were swapped in and out.
This record served several purposes. The purchasing information fields (vendor, PO number, Order Date, Received Date, etc.) were put into the part record, so it became the basis for the POs. It also had assembly information, like completion date, serial number, and QC test information, so it served as both the picklist and the final checklist for the product.
When preparing the product to ship to the customer, the records also became part of the packing list. Since not every part needed to show on the packing list, only those flagged to “print on packing list” showed up which simplified the documentation.
Since the same records were getting updated throughout the purchasing and production process, the salespeople could take a look at any time to see what had been received, what had been assembled, and what had been tested. While they could see this information in real time at anytime, they also received weekly reports sorted by customer showing progress that had been made on the orders.